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Exclude from testing if Term <501 hours


Tom

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We have a business with only one eligible employee other than the owner. . For 2022 this employees was fully covered by the 3% nonelective safe harbor and profit sharing.  For 2023, the person worked about 50 hours and earned $1,000 and terminated before the end of 2023.  So the employee will get the safe harbor.  What about the rule - if terminated and less than 501 hours can be excluded from coverage testing?   The question is profit sharing.  The owner is getting high PS%.  I know PS for this employee is miniscule.  Still for my own knowledge, what is the rule here?  I know if  I put this into our admin system it will say fail 401(a)(4).  So the term with <501 hours apparently does not apply to 401(a)(4).  That's fine.  I just wanted to nail down this rule.  It could be more meaningful rule in a larger plan to exempt this one person from 401(b) but still be able to pass 401(a)(4) due to all the other employees receiving PS.

Thanks

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The rule is that they may be excluded if:

  1. They terminated employment with less than 500 hours of service;
  2. They did not benefit in the plan; and
  3. The sole reason they did not benefit is because they terminated with less than 500 hours of service.

In your case #2 is not satisfied, because they did benefit. Safe harbor non-elective is aggregated with profit sharing for 410(b) and 401(a)(4) purposes, so they are considered benefiting for PS because they received a safe harbor contribution. So they can not be excluded.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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Safe harbor and profit sharing are both nonelective contributions provided by the employer.  So they're tested together - you get one but not the other, you nevertheless benefited.  So the T<501 exclusion does not apply, basically because the person literally benefited.

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